24/7 Wall St. Key Points:
- Trying to figure out what to do with an inheritance is challenging! It depends on your personal financial plans for the future.
- Partnering with financial professionals will help you evaluate your options holistically and make the best decision for your financial goals and lifestyle.
- Also: Take this quiz to see if you’re on track to retire (Sponsored)
In a recent Reddit post, a user shared a dilemma that’s common among those who receive a big inheritance: what do I do with it? In this particular case, the user and their sibling, both in their 40s, inherited a $20 million debt-free portfolio of multi-family properties in very high-cost-of-living (VHCOL) areas, returning a solid 5% cap rate.
The managers of the property are very reliable, and the poster doesn’t have any immediate need for income. However, they’re unsure whether they should keep the properties or invest them. (Of even, potentially, buy more properties.)
This decision requires careful analysis and a good understanding of your goals. Let’s take a look at what factors should be considered and my advice for helping navigate the complexities of inheritance management.
1. Evaluate the Portfolio’s Performance
A 5% cap rate in a VHCOL area suggests the properties are performing well, but it’s worth comparing this to potential returns from other investments like the stock market. When you have that much money invested, it’s best to spread it out across several investment vehicles, such as real estate, stocks, and bonds.
Since all the money has already been invested, though, you can get an accurate idea of what the properties will earn in income. Understanding the real net income versus projected growth in alternative investments is important for ongoing expenses, property management fees, and market trends.
2. Consider Your Lifestyle and Expertise
Managing real estate requires some amount of involvement, even if you have property managers. You’ll have to make some executive decisions from time to time. If none of the inheritors want to learn about real estate and make these decisions, it may not be a good idea to hold onto them.
Alternatively, you could hire a real estate investment advisor to help grow your portfolio more without taking as much on. However, you’d have to find someone you could trust!
3. Weigh the Benefits of the Stepped-Up Basis
Selling now allows you to take advantage of the stepped-up basis, minimizing capital gains taxes on appreciated property. This could maximize your net proceeds for reinvestment if you wanted to sell. However, most real estate investments will make more over their lifetime than if sold. If you do want to sell, it’s best to do it now.
You do have to consider the costs of selling, too. Transaction costs, taxes, and other costs can add up!
4. Explore Leverage for Expansion
Leveraging the portfolio to acquire more properties can amplify returns but also increase risk. This approach requires a deep understanding of real estate markets and a willingness to take on additional debt. I wouldn’t recommend this option unless the inheritor was planning on becoming very involved in real estate.
You can consult with a real estate investment advisor or a strategist to help you figure out if this path is worth pursuing or not. They can also let you know about some real estate strategies that you may be able to take advantage of.
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